PRT NINEWA:LENDING MARKET IS DRY BUT SECURITY

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 003675

SIPDIS

SIPDIS

E.O. 12958: DECL: 11/04/2017
TAGS: EAGR EAID EINV IZ PGOV PTER
SUBJECT: PRT NINEWA:LENDING MARKET IS DRY BUT SECURITY
IMPROVEMENTS AND BAGHDAD ACTION COULD GET FUNDS FLOWING
AGAIN

BAGHDAD 00003675 001.2 OF 003


Classified By: Ninewa PRT Leader Jason Hyland: for reasons 1.4 (B) and
(D).

(U) 1. This is a Ninewa Provincial Reconstruction Team (PRT)
message.

Summary
--------------


2. (SBU) Ninewa banks have nearly ceased providing loans to
the private sector, citing dual security-related constraints
on the enforcement of loan terms and on general economic
activity. State-owned banks complain that a lack of
authority, funds and staff also restrict their operations.
The little lending that does occur is in government lending
institutions, like the Agriculture Bank, using
government-linked collateral. While near-term solutions like
non-bank microlending may improve Ninewa's credit
environment, two systemic improvements would provide the
framework to support provincial lending: increased support
for loan collection and a lowering of the Central Bank of
Iraq (CBI) deposit rate.

Fearful Bankers and Officials
Avoid Confrontation
--------------


3. (C) In meetings over the last three months, private and
state-owned bank managers in Mosul complained to the
Provincial Reconstruction Team (PRT) that criminal
kidnappings and homicides of bank employees scare them away
from trying to enforce loan repayment. When unpaid loans
come due, the managers said they regularly issue the
borrowers a new loan to roll over their debt to avoid the
complications and hazards of trying to force repayment
through the legal system. One manager cited 14 specific bad
debts that he tried to resolve since 2003. Each debt was
backed by buildings used as collateral, which he tried to
seize by working through the local real estate office of the
Director General of Municipalities. The manager said that
office refused to support the seizure and auction of the
borrowers' land, even though it had been staked as
collateral, because of fear of criminal retribution as well
as administrative delays in registering and assessing land.

Restricted Bank Access,
Economic Activity Down
--------------


4. (C) Bank managers throughout Ninewa, northern Iraq,
lamented the negative affects of road closures and
transportation insecurity on the economic activity that would
normally drive lending. Checkpoints on a bridge near several
Mosul banks have practically eliminated access for what two
bankers estimate to be 500,000 daily commuters and potential
customers. In the western Ninewa city of Tal Afar, a bank
manager says his customers would normally be inter-city
traders but that a lack of fuel and attacks on the main road
to Mosul have severely limited their business, and
correspondingly reduced their need for banking services.
Street closures also impede the banks' own activities, as
managers are forced to hand-carry deposits to the local CBI
offices.

Lack of Central Support for
Banking Operations
--------------


5. (C) Rural Ninewans only have access to the state-owned Al
Rafidein Bank and Agriculture Bank, our contacts tell us.
While the Agriculture Bank is marginally active (see below),
rural Al Rafidein managers in both eastern and western Ninewa
complained that they are swamped with government salary and
pension payment responsibilities and lack the authority and
staffing to expand into lending. The Al Hamdaniya manager
said he only has authority to make loans up to USD 5,000,
while a Tal Afar manager said he must clear loans of all
amounts through his bank's Baghdad headquarters.

Tied Lending In Both Public
and Private Banks
--------------


6. (C) In this financially and administratively restrictive
environment, the few Ninewa banks that do lend are using
insider loans. For a state-owned institution like the
Agriculture Bank, this means that only government-owned

BAGHDAD 00003675 002 OF 003


property or the guarantee of four government employees'
salaries are acceptable collateral for a loan. (Note: The
majority of Ninewa's farmland is actually owned by the
government but worked by individual farmers under tribal or
individual lease arrangements with the government.) While
the state-owned Agriculture Bank looks for lenders who can
stake government land and government salaries for their
loans, private banks can not similarly garnish government
salaries. Nonetheless, the PRT has heard suggestions of
insider lending in the private banks. Middle East Bank Mosul
Director Mohammed al-Makhion, for example, said his bank
"prefers to give loans to shareholders," though his bank,s
main office said Middle East Bank investors receive no
preference.


7. (SBU) The Agricultural Bank appears to be Ninewa's most
actively lending bank, with about loans to about 40 farm
projects like olive farms, support for wheat and barley
farming, and water wells. The bank's five provincial
branches make loans up to 25 million Iraqi dinars (about USD
20,000) at as low as 7 percent, well below the private bank
interest rates of between 12 and 23 percent. (Note: Bankers
say they rarely find a borrower who will pay more than 17
percent interest.) The bank also makes standard of living
loans to government employees for up to 3 million Iraqi
dinars (about USD 2400) at a rate of 8 percent.

Security Demands High Collateral Requirements
--------------


8. (SBU) Amid security fears, a lack of authority and
cautious management, Ninewa bankers described the few types
of collateral they would accept to make one of their rare
loans outside the circle of connected borrowers described
above. Managers from both private and state-owned banks in
both Mosul and rural areas agree on their preferred
collateral: commercial buildings assessed at two to three
times the value of the loan. In addition, private Mosul
bankers said they would accept gold, CBI bonds and bank
shares valued at about 40 percent of the loan and set aside
with the lender. The banks said they do not take undeveloped
land as collateral, a policy they said was generally true
before 2003 as well. Bare land lacks any structures with
auction value, the bankers said. In addition, Ninewa bankers
said that most rural land in the province is actually owned
by the government and could not be used as collateral until a
national property rights law puts tribal and government
leased land under the ownership of local residents.

No Local Organization, No Desire for USG Help
--------------


9. (C) Ninewa bankers uniformly rejected offers of USG
assistance and training, explaining that they understand how
to conduct profitable local banking operations if only the
security situation were improved. The bankers said they
never meet as a group, nor are they interested in joint
advocacy directed at the GOI. Even the CBI northern region
interim director, whose office is in Mosul, said he conducts
little training, oversight or advocacy efforts for the banks
under his purview. (Note: The last head of the CBI northern
region, a close USG contact, was assassinated in May 2007.)

Non-bank Lending Can Help but ...
--------------


10. (SBU) Microlending of less than USD 5,000 through
non-bank organizations and institutions could meet a small
portion of Ninewa's credit needs. The PRT is supporting an
expansion of microlending to more rural towns and Mosul
neighborhoods through increased capacity at the Ninewa
Business Center, which has a microcredit portfolio size of
more than USD 2 million through 400 loans, the Tal Afar
Economic Development Center, which has about USD 100,000 out
in 50 microloans, and new rural institutions.

... Insecurity Plagues Disorganized MOLSA Loans
-------------- --


11. (C) Ninewa's Employment Service Center, an institution of
the Ministry of Labor and Social Affairs, is also working to
provide microloans through Deputy Prime Minister Barhem
Saleh's national microloan program. However, the Ninewa
portion of the program may never get off the ground because
of security and organizational problems. The center's
director said she has received numerous threats from
individuals who say the program's stipulation of a 2 percent

BAGHDAD 00003675 003 OF 003


interest charge is against Islam. As a result, some of her
already thinly stretched staff have stopped coming to work.
Those who remain lack the lending experience, training and
accounting background to properly administer the loans and
ensure that the funds go to legitimate borrowers, rather than
criminals, the director said. For comparison, a
PRT-supported microgrant program used a staff of 20 to
distribute 200 grants over four months, while the center's
director has three staff to distribute and collect repayments
on 3,000 loans of USD 2,400 each over the next year.

Comment: Support Collections, Reduce CBI Rate
--------------


12. (C) Comment: The work of Coalition Forces and Iraqi
Security Forces to improve security should help lessen the
impact of criminal activity on the banking system.
Simultaneously, GOI institutions could boost lending by
assisting banks with efficient court decisions that support
loan terms and with an energized local real estate office
that enforces collateral seizures, reducing the amount of
collateral that wary banks feel they must demand. Finally,
the CBI could help make lending more attractive to local
bankers by reducing its deposit rate. While the currently
high rate may have been emplaced to fight inflation, it
leaves bankers no incentive to push credit out to Ninewa's
natural traders and entrepreneurs who drive economic growth.
With a Ninewa business paying 17 percent on a loan in the
best of times, bankers would clearly choose the risk-free CBI
deposits of 20 percent or more. Even a reduction in the
CBI's deposit rate of a few percentage points would help make
local private lending more attractive to local bankers.
CROCKER